Should Failing Private Pension Funds Get a Federal Bailout?

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Senator Sherrod Brown (D-OH) and Representative Richard Neal (D-MA) introduced legislation last week that would create a new Pension Rehabilitation Administration within the Treasury Department. The PRA would make emergency loans to failing defined benefit pension plans, preserving full benefits for retired members. The Treasury Department would fund these loans by issuing new federal debt securities.

Although problems with public employee retirement plans are frequently in the news, the Brown/Neal bill addresses private sector multiemployer plans, many of which are struggling. Under federal pension law, plans must advise their members when they enter a “red zone” of insufficient funding or liquidity. Such plans typically have assets sufficient to cover 65 percent or less of actuarial liabilities. Last year, more than 250 private sector multiemployer plans notified members that they were in critical status.

The largest multiemployer plan in critical status is Central States, Southeast and Southwest Areas Pension Plan, which provides benefits to almost 200,000 retirees and survivors. Another 185,000 present and former workers are eligible for future benefits from the plan, which was organized in 1955 to provide retirement security to members of Teamster Local Unions.

As of December 31, 2016 the plan reported $15 billion is assets and $41 billion in actuarial liabilities, leaving it just 37 percent funded. In calculating the projected cost of future benefit payments, Central States actuaries apply a 5.5 percent discount rate, which is more conservative that the rates used by most public employee retirement plans. But federal retirement law requires private sector pension plans to also report their liabilities using a standardized, and even more conservative methodology. Under the Retirement Protection Act of 1994 (RPA ’94) procedure, plans must use a high grade corporate bond rate to discount future liabilities. According to the RPA ’94 methodology, Central States funded ratio is just 29 percent (as of January 1, 2016).

When a private multiemployer plan fails, retired members are covered by the federal Pension Benefit Guaranty Corporation — but PBGC’s multiemployer benefits are limited. A retiree who worked 30 years for companies participating in covered plans is eligible for no more than $12,870 of PBGC benefits annually, and may well receive much less. Private sector retirees also receive Social Security benefits, but these only average around $17,000 per year, so the combination of Social Security and PBGC payments may not provide adequate income for retired workers.

To make matters worse, PBGC itself has solvency issues. Its actuaries estimate that the corporation’s multiemployer benefit fund has more than a 50 percent chance of becoming insolvent by 2025 and a 90 percent chance of going broke by 2030. If this happens, PBGC would have to rely solely on the premiums it receives to pay benefits. Since this premium income is a small fraction of the fund’s annual payment obligation, it would have to slash the already minimal benefits it pays.

Multiemployer plans may be able to avoid insolvency — and thus the necessity of pushing retirees onto PBGC’s frayed safety net — by increasing employer and employee contributions and/or reducing benefits. In 2014, Congress passed the Kline-Miller Multiemployer Pension Reform Act, which establishes a process for cutting pension benefits. Under the law, plan sponsors propose benefit reductions to the Treasury Department. If Treasury approves, the proposed benefit cut is then submitted to plan members (active workers and retirees) for a vote. Unless more than half the membership votes against the reduction, it goes into effect. In 2016, Treasury rejected such a proposal by Central States. But, more recently, it approved cuts in a smaller Teamsters system: the New York State Teamsters Conference Pension and Retirement Plan.

The Brown/Neal legislation would forestall further cuts to multiemployer pension fund benefits by allowing plans to borrow from the Treasury at low interest rates for 30 years. According to Brown’s press release: “The 30-year loans would buy time for the pension plans to make smart long-term investments for the future, while continuing to pay benefits owed to current retirees.” The senator also says that the bill “would not allow any plan to borrow more than it can pay back to taxpayers” and would “prohibit any borrowed funds from being used to make risky investments.”

But it is hard to see how all these objectives can be achieved. A core challenge is that the financially distressed multiemployer pension plans are in shriveling industries. For example, the United Mine Workers plan has 10 retirees for every active member. While coal mining may enjoy a temporary boost under President Trump, it is hard to believe that we will be mining much coal in the U.S. 30 years from now when the Treasury loans would come due. That means there will be little if any contribution income available to pay retirees, let alone reimburse the Treasury. The Mine Workers plan might still be able to repay Treasury if it could achieve large capital gains on the money it borrows, but this would require the fund to buy risky assets — an option foreclosed by the bill.

Although Brown has 11 Senate cosponsors and Neal has 39 cosponsors in the House, no Republicans have signed onto the bill, suggesting that it has little chance of advancing in the current Congress. But it gives Democrats a great opportunity to attract swing state working class voters in the 2018 midterm elections. A Democratic sweep would greatly improve the chances for this legislation in the next Congress. If it passes, Trump might sign it, given his focus on working class voters.

Bailing out pension funds by offering them unpayable loans simply kicks the can down the road and increases future deficits in a non-transparent manner. Worse, this approach could easily spread to public sector retirement plans, allowing them to maintain unsustainable benefit formulas.

A better option would involve recapitalizing PBGC, allowing it to provide a more solid cushion for retirees in failing plans. Multiemployer plans that have yet to collapse into the arms of PBGC should be stabilized through benefit cuts and contribution increases. If Congress chooses to inject taxpayer money into distressed plans, it should do so through outright subsidies rather than loans, so the cost is evident to all. Ideally, any federal appropriation for this purpose should be offset by spending cuts elsewhere, but in today’s undisciplined spending environment, that is probably too much to hope for.

Marc Joffe, a senior policy analyst at the Reason Foundation, has written for the Mercatus Center at George Mason University and the Haas Institute at UC Berkeley. Previously, he was the director of policy research for the California Policy Center and a senior director at Moody’s Analytics.